Preparing for the 403(b) Prototype Program

October 21, 2011 (PLANSPONSOR (b)lines) - One of the more significant changes included in final 403(b) regulations, which became effective in 2009, was the written plan requirement.

Similar to the rules for qualified plans (401(a)/403(a)/401(k)) and 457(b) plans), this requirement includes two separate components: form and operation.  With respect to the form requirement, plan sponsors and prospective document providers are awaiting final 403(b) prototype guidance.   

In light of the recent IRS publication of an update to its guidance for rulings and determination letters for qualified plans, the 403(b) plan community is hopeful that 403(b) prototype guidance will follow shortly.  The reality, however, is that even if such guidance was issued today, it could still be well into 2013, or later, before a 403(b) prototype document is available for plan sponsors to adopt:    

  • Step 1: Submitting prototype documents for approval: Final guidance will identify a window of time for submissions.  That window will likely begin weeks or months following publication, and will likely be open for a number of months.  It is important to emphasize that this process will not include individualized documents for a single employer: a process for submitting these is expected to follow sometime after initiation of the 403(b) prototype program.  Many investment and service providers (including VALIC), as well as law firms and consultants, will submit 403(b) prototype documents for approval. 
  • Step 2: IRS review of prototype submissions: Expectations are that all IRS approvals of these new documents will be issued at the same time.  The length of that approval process can depend on several factors, including the number of documents submitted, the complexity of those documents, and competing claims and priorities for the IRS resources that will be reviewing the documents. 
  • Step 3: Making the approved documents available: Approved documents will not appear instantaneously, though plan sponsors may see an advance uptick in marketplace publicity for documents expected to arrive soon. 
  • Step 4:Review and adoption of a prototype:  This is an important step, but also one that can be easily overlooked.  Prototypes will likely come in all shapes and sizes: 
    • Some will be for deferrals only, while others will include multiple alternative contribution sources 
    • Some will include Roth features, others will not; those that contain the feature may or may not include an in-plan Roth conversion feature 
    • Plan design may range from very simple to more complex,  
    • Some will be tailored to ERISA or non-ERISA plans (including ERISA safe harbor plans), and even to individual segments within those categories, such as K-12, higher education, and healthcare 
    • Some will be available for use with any qualifying investment arrangement, while others may be product or investment platform-specific 


This is why technical accuracy – the focus of the IRS review process – is only the initial threshold.  Matching the plan document to the employer’s plan (vs. forcing the plan to fit the document) is also critically important.

What is a 403(b) plan sponsor to do in the interim?    

It is important to note that an employer is not required to have IRS approval of its 403(b) document.  Of course such approval provides some important benefits, not the least of which occurs in an IRS audit, when the employer gets an automatic pass on the form (but not the operation) of the written plan.   

Currently, however, it appears that employers are also getting nearly the equivalent of a pass on the form of the written plan, in an IRS audit, if the employer indicates that they will be adopting a prototype document when they become available and taking advantage of what is expected to be a very generous remedial amendment period.  (An employer that takes advantage of this remedial amendment relief will be required to adopt a prototype when they become available.)  

Public schools: It is expected that public schools will be able to continue to rely on the model plan language included in Rev. Proc. 2007-71 after prototypes become available.  If that is the case, then a public school that is satisfied with the extent of reliance provided by this language (which will depend on the extent of model language utilized) need take no action when prototypes become available.  Nevertheless, many will take a look at the prototypes to see what features they offer.  

Other eligible employers: Although these employers have no formal reliance on the model language, many have incorporated portions of the model language into their documents, sometimes focusing on key provisions, with an expectation that the IRS would not reject the language in a review.  These employers also share the expectation of a generous remedial amendment period in the final prototype guidance (not currently available in the model plan language), and many of them will be looking for a prototype document when they become available.  It will be particularly important to review any prototype document with counsel to confirm that it matches the desired plan configuration.    

For either group of employers, some of the potential errors can include:  

  • An ERISA prototype, adopted for a governmental plan, a non-electing church plan, or an ERISA safe harbor plan; 
  • A prototype with a fixed contribution rate (money purchase), adopted for a more flexible contribution (profit sharing) plan; 
  • A prototype with 100% immediate vesting, adopted for a plan with a different vesting schedule; and 
  • A prototype tailored to a single product or platform, adopted for a multi-provider plan. 


All 403(b) plan sponsors, along with sponsors of other types of retirement plans, should carefully review and discuss any proposed plan document with their counsel.  When it comes to 403(b) prototypes, those discussions can start now (and may have started already), but cannot be acted upon until the document is made available in the future.  


Richard Turner serves as Vice President and Deputy General Counsel at VALIC. He was recently appointed to the U.S. Department of Labor ERISA Advisory Council and is a contributing author of the “403(b) Answer Book.”  


This article is for informational purposes only and should not be construed or used as legal or tax advice.